Are shares on the London Stock Exchange (LSE) cheap now? I think a load of them are dirt cheap, yes. And I want to explain why.
There are individual stocks with valuations that look plain crazy to me. I mean, Barclays on a price-to-earnings (P/E) multiple of only five?
I know the bank sector faces risks now, and an investor should be sure they understand them before they buy.
But one of our best banks valued at only around a third of the long-term FTSE 100 average? Come on!
Slow mover
What really makes me think LSE shares are so cheap is looking at the world’s other stock markets.
The FTSE 100 has gone nowhere in the past five years. I know, those years include the Covid pandemic, war in Europe, and soaring inflation and interest rates.
But the others have been hit by the same things. Yet the S&P 500 over in the US is up 60% in the same five years.
It’s the same in Europe, Japan… the UK stock market looks like a sick patient compared to the rest. Oh, and that’s even though most of our top stocks are international anyway.
Low P/E
What other things are there? Well, some analysts put the Footsie on an overall P/E of between 10.5 and 11. That’s well below the long-term average of 15, or so.
To get back on track, we’d need to see the index reach a level of over 10,000 points.
Does that sound ambitious? I feel sure it will happen, and that it could be a good bit sooner than people expect.
It’s not just me who thinks LSE shares are cheap. No, the companies themselves seem to agree.
Buybacks
If we take a quick look at the LSE headlines for over a single 24-hour period, we see a full 25 companies in the FTSE 100 buying back their own shares.
They include such heavyweights as Tesco, BP and, maybe you guessed it, Barclays.
Then if we do the same check on FTSE 250 companies, there are about 40 of those buying back their shares too.
What it says
A share buyback says two things. The companies have more cash than they need to run their businesses. And that’s a good thing in itself — I want to buy stocks that throw off lots of cash.
They could have handed cash back via special dividends. But they clearly see a benefit in going for buybacks instead, and that’s usually because they think their own shares are too cheap.
What should we do?
I might think these LSE shares are too cheap now. But that doesn’t mean they can’t go lower. There’s always that risk.
And while we face high inflation and interest rates, that risk is probably at its highest.
But for the long term, I reckon 2023 could turn out to be one of the best years to buy LSE shares. At least, for long-term investors who plan to hold for a decade or more.
